Updated with correction
Institutional investors are beginning to dramatically restructure their hedge fund portfolios, pairing a core allocation of cheaper alternative beta investment strategies with a satellite portfolio of alpha-generating hedge funds.
The trend is nascent but gradually gaining converts, attracting interest from asset owners fed up with paying hedge fund managers high fees for promised alpha that turns out to be market beta, observers said.
Money managers and consultants report they've seen huge interest in alternative beta portfolios in the past year from institutional investors of all kinds, including corporate and public pension plans and sovereign wealth funds.
Alternative beta strategies assume that risk premiums — the return from holding assets that carry risk — can be identified by a wide range of factors beyond simple market risk. Managers capture risk premiums systematically through passive replication strategies or actively managed, long/short multiasset strategies that invest in securities that meet factor characteristics. The approach also is known as alternative risk-premium or alternative factor-based investing.
“There is a strong need for alternative investments to provide diversification by offering uncorrelated returns to investors, which hedge funds provide better than real estate or private equity,” said Lionel Erdely, chief investment officer and head of alternative solutions, Investcorp Investment Advisers LLC, New York.
“Alternative beta can provide the robust diversification advantages of hedge without the high cost. Investors have a strong focus on hedge fund fees now,” Mr. Erdely added. He declined to provide the size of Investcorp's alternative beta strategies but said the firm has seen “very strong interest and an acceleration of inflows.”
That said, sources agreed the pace of institutional investor movement from investigation of alternative beta strategies to investment still is slow.